For the last several years, there has been a verbal life insurance war going on. The “verbal war” surrounds sketchy opinions from “financial gurus” as well as numerous Life Insurance Agents/Brokers. We’re going to touch on the question and controversy of Term Life vs Whole Life insurance in this article.
Is there really a “best” product out there? Is term life insurance the answer to your prayers or is whole life just a better option?
Self proclaimed “experts” would say you should buy only term life insurance (cheap in comparison to Whole Life Insurance) and invest the savings in the stock market instead. The pundits explanation is… you are being “ripped off” on a terrible “investment” when you buy cash value, whole life insurance because it has a terrible rate of return.
Wow, a life insurance policy being compared to the stock market? An apples to oranges comparison with little to no risk (Whole Life Insurance) versus the stock market (higher risk). Of course the stock market can potentially generate higher returns. Because their are no guaranteed sums of money like a whole life insurance policy provides, permanently.
What is being overlooked…term life insurance is temporary. It may or may not satisfy the goals desired by the owner of the policy. In other words, something that guarantees peace of mind.
Life Insurance Distractions
The problem with the self purported financial “experts” is they don’t understand the needs of people who want financial security. Term vs whole life insurance should not be so much about the cost of it, but rather the needs you have ensure.
Whole life insurance is not an investment. It offers guarantees. Investments can completely implode and become worthless.
Michigan state law prohibits any agent/broker from telling consumers that life insurance is an investment. Seems kind of odd since the “experts” are telling you that it is an investment in the first place, right? Who’s right and who’s wrong?
Why does the state of Michigan say it is not and investment then?
It confuses consumers, that’s why. Life insurance is financial protection first and foremost. It protects the beneficiary financially from the loss of life of the insured person.
Now, only a licensed life insurance agent/broker can advise you and market/sell life insurance to you. Many consumers do not realize this. If you purchase insurance “direct” from the home office of an insurer, you will be working with a captive agent with that represents only that 1 company.
Before you purchase a term or whole life insurance policy that you know the experience of whom you take advice from. Are they a license life insurance broker or just a financial commentator? Remember, some of these financial “experts” are just entertainers trying to sell you something of their own they are marketing. Creating controversy draws attention to them.
While we are not licensed to provide investment advice, we are licensed in to advise and provide life insurance to consumers. Special Risk Life is a licensed, independent life insurance agency that offers dozens of the top life insurance companies. Our business offers and recommends financial protection for your family and business. We do not offer investment advice but are happy to provide a referral to an excellent Certified Financial Planner (CFP) if needed.
Here is a Dose of Term vs Whole Life Insurance Reality
First and foremost, whole life insurance is permanent financial risk protection on the value of someones life to a defined policy beneficiary. It is not something you buy as an investment. It is a “financial protection vehicle” sold by state licensed life insurance agents, not stock brokers. Accumulating and compounding cash value is simply a living benefit of the policy.
Some consumers of this type of life coverage may value compounding interest and may use whole life to leverage accrued cash value in the policy elsewhere, but that is not the primary intent of the product, just a feature.
Yes, you do pay interest back to the insurer if you borrow while leveraging, but you are borrowing money that will be compounding on an ever increasing value always moving in an upward direction. For example, if you have $50,000 in cash value accumulated in a whole life policy and borrow $10,000 to use elsewhere of your choosing, you will still receive compounded interest on $50,000 versus $40,000. You will have to pay interest on $10,000 to the insurance company, but at a fair rate on the smaller amount. This adds up over the years even if interest rates have dipped to 2%. No bank or investment I know of allow this.
The Term Life Insurance Compromise
Many people are just very uncomfortable with investments. You cannot teach an old dog new tricks nor should you. Investing takes knowledge, emotional discipline and the realization that you can lose money, very quickly. It can take years to recover from and there are not guarantees you won’t lose your shirt.
For someone who needs life insurance for a defined period of time, such as the length of a mortgage, term life insurance might be the perfect solution. It is pure life insurance protection for 5, 10, 15, 20 or 30 years. Because it is temporary coverage and does not build any cash value, it is much lower in cost. Term life is designed for the “what-ifs” during the “term” you select at application.
With that said, can any of the “buy term life only” advocates guarantee you that you’ll come out way ahead by investing your savings in the stock market years down the road? Absolutely not. They certainly act confident about it, but really ignore the means and investment comfort of those they are marketing to. It is a viable strategy to deploy but not the cup of tea for the many life insurance consumers.
Keep This In Mind… Whole Life Insurance is Not for Everyone.
Whole Life is more expensive than term life for obvious reasons. If kept by the policy owner it will pay out in the future if the insurance is kept in force. It is permanent life insurance so the insurance carrier is on the hook. We all will pass on from this life in our own time. It is a universal truth. This is the real reason it is more expensive than other forms of life insurance.
As people live longer and longer it does change our needs. Many, many people even the very wealthy have used whole life insurance or other permanent insurance options to handle their estate taxes for years.
Term life insurance is typically harder to qualify for and it typically does not extend beyond age 80. Life expectancy of people in this country are growing higher and higher due to modern medicine.
Whole Life Insurance is a guarantee when our time comes, that the named beneficiary of the policy will have monies to continue on in the absence of the insured. Those monies are income tax free to a properly name beneficiary and also bypass probate.
So… Are You Saying I Should Buy Whole Life Insurance?
No, I am not, but here are a few reasons many have and will opt to purchase a whole life insurance policy. These often include:
- Build-up of cash value. A benefit of cash value is part of a whole life insurance policy that can never decrease in value – unless the policy holder borrows or withdraws these funds. Over time, these funds can become quite substantial. It is important to choose an insurer with a high rating for financial stability and a policy built to perform if cash value is your goal.
- Tax advantages. Life insurance policies offer unique tax advantages among financial “vehicles.” Funds within a whole life policy’s cash value account will grow tax deferred. No gain within that account will be taxed until the funds are actually taken.
- Dividends. Some whole life insurance policies also pay out dividends to the policy holder. This type of life insurance policy is called a “participating or par policy.” These funds may be taken in the form of a direct check, or they can be reinvested into the cash value component of the policy. Alternatively, dividends may also be used to purchase “paid-up additions” – or additional insurance, in order to provide the insured with a larger amount of death benefit.
- Compounding Interest. All accumulated cash value in the policy earns compounded interest whether you borrow funds from the insurance company or not. Therefore you are able of borrow the money for a fair interest rate yet earn compound interest on the full cash value in the policy. In effect, you are able to leverage cash value for a lower rate and use it elsewhere as needed. What other financial vehicle offers this?
- Coverage for the insured’s whole life. Certainly, as its name implies, whole life insurance will provide coverage throughout the life of the insured. This is a time tested, permanent life insurance coverage. This can help to provide peace of mind in knowing that coverage will never run out, as long as the policy’s premium continues to be paid. The policy beneficiary is guaranteed to receive the face amount (death benefit) less any outstanding loans you borrowed along the way.
Where Do I Stand in The Term Life vs Whole Life Drama?
Now you might have started to believe that I am a “pro” whole life insurance guy. While in some cases, that is true. However, I have owned a couple term life insurance policies that will be expiring in 2028. Recently, I personally chose a indexed universal life insurance policy to cover my permanent coverage goals.
I do still own some term life insurance and used the savings from paying for the more expensive whole life policy and invested the money in the stock market. I’m comfortable with the risk vs potential gain. Now that I’m getting into my late 50’s, I do need to be more conservation. My consideration of passing on a legacy to my 2 kids is the next phase. Permanent, indexed universal life insurance was the answer for me.
Term life insurance is an excellent solution when you just need pure insurance protection for a limited or defined period of time. It is for the “what-ifs.” It is low lost and does the job if something unexpected occurs.
Some term policies have excellent additional living benefits in them for chronic illness, critical illness or even cancer. These are called riders.
The right life insurance policy for you depends completely on your age, needs, means and goals.
For a family with younger children on a tight budget, 20-30 year term life insurance is usually a good start. We write a good number of cases in that mold. These are sometimes blended term life only policies.
Other coverage options exist out there beyond term and whole life as well. Guaranteed Universal Life (GUL) is has its own market as it is more affordable and offers permanent coverage as well. Quite a bit cheaper than whole life as well but is currently only available in larger policy such as $50,000 or greater. This is a great alternative if cash value is not important to you. GUL offers permanent life insurance protection for estate planning, pension maximization, charitable giving or anyone looking for excellent affordability.
I do advocate taking a look at Guaranteed Universal Life Insurance against Whole Life Insurance if you need permanent coverage and need $50,000 or more in death benefits.
All of these different types of policies entail different benefits and cost. Of course term life insurance is cheap by comparison to whole life. Coverage is temporary and the risk to the company is much lower. It also has no cash value in the policy that develops. The odds are the insurer will not have to pay the beneficiary during the “term” of the policy.
The value of term life insurance is in the peace of mind knowing that if the insured passes away, the beneficiary(s) will have their financial needs met during the time they’re most vulnerable to financial risk. Term life is very, very affordable so the cost of having pure protection of even high death benefits is quite low.
Here is a good way of thinking about term vs whole life insurance products. With term insurance policy, you are renting protection for a specified number of years. With a permanent coverage such a whole life insurance policy, you can actually own the coverage and it will cover the life of the insured till death occurs.
Term vs Whole Life Insurance Conclusion:
Investing is investing. You don’t invest to insure yourself…. particularly in the stock market. The stock market has no guarantees. The housing crisis, nearing 20 years ago now, wiped out a lot of hard earned cash from plenty of “investors.” I was one of them in fact. Fortunately, I was young enough and hung in there. Kept my money in the market and had it return. Took several years to bounce back. Glad I left a good portion of it there. Wished I had left it all in!! Will it tank again? Personally, I think we are due for a big correction but that is only my opinion.
Investing is investing. Whole life policies will keep on climbing when the stock market takes it’s next dive. Some people just like security and no worries. They are happy to live like that. Don’t knock them for it and don’t insult the people who help them obtain the coverage either.
There are financial protection strategies to be employed. Some blend multiple kinds of life insurance for different stages and needs of different people. This is often the best value and protection you can get when permanent protection is desirable or required. We’ve designed term vs whole life insurance cases where both products are deployed because of the goals the client.
Again, they type of life insurance you buy really depends on what you need specifically. There is not best type of coverage. Don’t assume blanket advice applies to you. Find good consultation and work through it. What are your best options to save money but have your needs met?
We are here to listen to your needs. Once we have an understanding of your situation, it isn’t too hard to provide the best solutions. Call today for your free quote. 269-230-3464
Michael is a veteran independent life and health insurance agent who specializes in guiding people with even high risk health conditions thru the insurance process. He is passionate about helping individuals and families get their unique financial protection needs met, providing his experienced based advise and delivering affordable, dependable coverage you can count on.
